Higher Asean Spending Power

NEWS ANALYSIS
By LOONG TSE MIN

THE expected continued weakening of the US dollar could mean higher spending power for people in Asean countries, including Malaysia.

Kenanga Investment Bank economist Wan Suhaimi Saidi is targeting 3.25 to the dollar for the ringgit by end-2008 and a 3.35 to 3.40 by Dec 31.

With an expected fuel price and electricity rates hike on the horizon, is it really true that Malaysians will have more money to spend?

Well, local economists seem to think so.

OSK Investment Bank economist Sia Ket Ee said the country's fundamentals were strong and the sustained trade surplus, continued foreign direct investment flows and favourable growth story, all point towards an appreciation of the local currency, leading to better spending power.

Another plus point for the strengthening of the ringgit against the greenback is that the exchange rate has actually lagged behind the theoretical rate on trade-weighted basis.

“This means that despite the strengthening of the ringgit in recent months, there is room for further appreciation,” Sia said.

Many would now be asking whether a rising ringgit will hurt exports but according the economists, the scenario has changed.

Instead, a weaker US dollar to regional currencies is now desirable.

It will go some way in correcting the “global trade imbalance” that is resulting in huge trade deficit being faced by the US and that the US government has been frequently commenting on.

Sia said: “This trade deficit cannot go on forever, the world cannot sustain this”.

A rebalancing of the trade deficit will lead to healthier long-term global economic growth, said both economists.

Another reason why the region can sustain a weaker dollar is that 10 years after the Asian financial crisis, economies in the region are fundamentally stronger and less dependent on exports.

At the same time, savings rates in many countries remain very high.

However, Wan Suhaimi cautions that while the US dollar might weaken, “in the investment world, there will still be an affinity to the US dollar” as the US is still the world's largest economy.

He expects the dollar to stabilise in late 2008, before the market assesses the currency again.